The futures trading industry offers a number of unique benefits for active investors. Whether it’s the diverse mix of investment options, such as commodities, equity indexes, currencies and treasury bonds, or the myriad of advantages when compared to other investment options, futures can be a fantastic vehicle to hedge risk and make your dollar work harder.
Below are 5 advantages to trading futures:
Leverage enables futures traders to trade traditionally large contract sizes, at a fraction of the cost. Due to the way futures contracts are structured, the investor is only required to put down a percentage of the total contract value to enter into a trade.
Please remember, there is risk that comes with highly leveraged futures trading.
2. Interest Free
Futures day traders do not have to pay interest on the remaining value of the leveraged futures contract. This is due to the margin requirements for day trading set by a futures broker. Conversely, stock traders must gain special approval to day trade on margin and are required to pay interest on the remainder value of an equity trade.
Greater liquidity typically leads to entries and exits of virtually any size filling without significant changes in price. Spreads, the difference between bid and ask price, are ‘tighter’ in more liquid markets. Tighter spreads in highly liquid markets results in transitions occurring at much higher speeds reducing fill price fluctuations.
4. Lower Commissions
Futures contract commissions are usually lower than other financial instruments. For example, NinjaTrader offers commissions as low as $0.53 per futures contract. Alternatively, equity broker commissions are much higher and, even when searching for a low rate, traders are often still starting at a minimum of $5 per trade.
Please note when comparing commissions of different financial instruments, exchange, NFA & routing fees apply to futures contracts.
5. Tax Advantages
The US government is more lenient on taxing gains achieved via trading futures online than other financial instruments such as equities. US futures traders are taxed at a 15% rate on 60% of profits, while the remaining 40% is taxed as regular income at the max rate of 35%. Equities held for less than 12 months on the other hand, are taxed as short-term gains at the max rate of 35%. Please note that all tax rates are not necessary the same and may differ based on total income and other circumstances.
To learn more about the benefits available through futures trading along with some key terms you will need to know before getting started, watch this quick video:
Remember past performance is not indicative of future results and you should always trade within your risk tolerance levels.